Technology buyouts are making a comeback.
As tech companies shed non-core assets, the quality of deal flow in this sector is improving. Throw in realistic valuations and a discerning investor community, and the negative reaction to the phrase “tech buyouts” doesn’t seem warranted anymore.
Take, for example, Silver Lake Partners. With its first fund already showing healthy returns, Silver Lake is out raising a new $3.5 billion tech fund. On March 15, Silver Lake teamed up with Bain Capital and Warburg Pincus on the $2.05 billion acquisition of UGS PLM Solutions, the product-lifecycle management unit of Electronic Data Systems.
Other players that are active in the space include Golden Gate Capital of San Francisco and Platinum Private Equity of Los Angeles. Golden Gate, which has $700 million under management, plans to raise an $800 million tech fund this summer. Platinum raised more than $500 million for its debut tech buyout fund last year.
Among other recent tech buyouts is Gores Technology Group’s acquisition of Proxicom Inc., a castoff of Dimension Data Holdings.
“Obviously we went through a massive correction between 2000 and 2003, but there is still a definite advantage to investing in technology companies,” says Ken Hao, managing director in the Menlo Park, Calif., office of Silver Lake. “We have never been busier with good opportunities.”
What’s motivating sellers? In some cases, the units being sold are solid performers, but are a distraction to the corporation’s core strategy. In other instances, the companies have become a drain on the balance sheet.
“Companies have started to, and will continue to, shed non-core assets,” says a buyout pro who invests in technology. “They are resetting their strategic decks.”
Buyout professionals say that when the economy improves, companies are forced to accept that their problems may be internal. “Tech companies are really looking at their non-core assets and shedding them,” says Silver Lake’s Hao. “There’s nothing to hide behind anymore.”
At the same time, as technology companies show improved performance, they are more aggressively restructuring. “They are looking for financial partners who can help them get where they want to be,” Hao says.
Trained For Tech
But while the stars seem to be aligned for tech buyouts, not every buyout firm should jump into the fray. Experienced players say that buyers must have the technical and operational expertise that comes with the territory. “More times than not this is roll-up-your-sleeves kind of work,” says one industry veteran. “They have to know what they are doing. There’s usually a lot of internal problems that need to be worked out.”
Says another tech buyout vet: “We’re seeing firms without expertise showing up at auctions because of the upswing in the market, but they’re not ready to invest in this type of company. It will be interesting to see how that plays out.”
Given how badly investors were burned in the tech boom, limited partners are acutely aware of how important it is for those doing tech buyouts to have a track record. The California Public Employees Retirement System (CalPERS) invested $125 million in Silver Lake Partners II – a fund expected to top out at $3 billion – not so much because it loves technology but because of Silver Lake’s past success. Silver Lake’s first fund, a 1999 fund with $2.3 billion in its coffers, has posted returns of more than 30%, according to performance data provided by CalPERS. That means that CalPERS will see a return of at least $19.5 million on its $65 million investment in Silver Lake’s first fund.
“You really have to make sure the firm has the expertise and the skill set to work with a technology company,” says Erik Hirsch, chief investment officer at Hamilton Lane Advisors, a private equity firm based in Bala Cynwyd, Penn. “You need to see how large the space is and how good a firm can play in it.”
That’s not to say that a buyout shop has to have a tech-only focus to be successful with tech deals. For example, Texas Pacific Group has “proven success in the area, and they have the expertise that is needed,” Hirsch says. “You have to look closer with anything that is more narrowly focused.”
This story also appears in Buyouts, an affiliated publication.